Sunday, June 11, 2017

Is economics a science?

While I was in Norway to give a talk about macroeconomics, an interdisciplinary group at the University of Oslo also invited me to give a talk about whether economics is a science or not. That's an impossible question, of course, since there's no official definition of what "a science" is. But I did have some thoughts on the matter. Here are the slides from the talk:

These slides don't speak for themselves quite as much as the macro slides did, and the topic is much broader and more vague, so I'll turn it into a full post. This post mostly just explains the slides.

What the heck is a "science"?

No one knows. Because no one has ever really been able to make one dominant definition of science stick. Some people define it as a method (e.g. Popper), some as a sociological phenomenon (Kuhn, Lakatos), and others don't even see much need for a definition (Feyerabend). And there are plenty of other opinions too.

So the argument over whether economics is "a science" will never be resolved.

It certainly isn't a lab science; though econ experiments are interesting and can be helpful, they lack ecological validity - i.e., what we really want to know is how the big, messy, complex world works in practice. So lab experiments by themselves aren't going to get the job done, or even come close.

Therefore, if econ is to be a "science", it has to be a largely empirical "science". And since empirical research and lab research are fundamentally different ways of understanding the world, that means some people will always say econ isn't a science. But if you accept that empirics can be "scientific", then econ has a chance.

Anyway, I do think there are three trends in economics that most people will agree are making it more scientific:

1. Theories with strong predictive power

2. Less theory, more empirical work

3. The "credibility revolution" in empirical economics

Theories that work

Lots of people claim that social science can't be a "science", because human beings don't obey precise mathematical laws. That just seems silly to me. First of all, plenty of natural sciences don't involve precise mathematical laws - what's the mathematical law describing how food passes through the digestive tract? Second of all, there are plenty of social science theories that are written in quantitative form - equations, numbers, and all that - and that have consistent ability to predict human behavior.

In the slides I give four examples from economics. These are:

1. Auction theory

2. Matching theory

3. Discrete choice models

4. Gravity trade models

This is an eclectic mix of theories. One is explicitly neoclassical (discrete choice), while another relies on individual rationality (auction theory). One is basically an algorithm for central planning (matching), which makes it a close cousin to lots of models in operations research (which, by the way, also frequently are able to predict human behavior with quantitative precision). And one, the gravity trade model, is a "big" theory that successfully predicts patterns of international trade involving billions of individuals.

So the idea that social science can't predict human behavior is pretty conclusively disproven, just by these four examples. There are, of course, many more such examples, most of which are probably not from econ.

But the fact that econ is making progress on this front is encouraging. Slowly, the discipline is building up a stable of models with good, reliable predictive power.

In fact, although it's a bit prosaic and boring, even the good old Econ 101 supply-and-demand model probably works great for some things. It doesn't work for labor markets, but I bet it can fairly accurately predict the effect of a Florida hurricane on orange prices.

Anyway, theories that work, and which have engineering applications beyond the halls of academia, are generally considered to be a hallmark of "real science," and people ought to know that econ is getting more and more of these theories.The empirical revolution and the credibility revolution

In recent years, economics has become much more empirical - theory papers used to represent almost two thirds of what got published in top journals, and as of 2011 they had fallen to just over one quarter. The stereotype that economists are "mathematical philosophers" who just sit around and make theories all day is less and less true.

Meanwhile, the "credibility revolution" - i.e., the rise of quasi-experimental methods - is rapidly increasing the direct real-world applicability of empirical economics. Instead of having to use dubious structural theories as an intermediary, economics papers are cutting right to the chase - finding believable estimates of the effects of policies like minimum wage and immigration.

This is having big real-world impacts. Minimum wage studies since the 1990s have found few short-term disemployment effects, which probably helped inform the decisions of a number of cities to increase their minimum wages to $15 in recent years. So far, studies of these new measures have agreed with the earlier results - there hasn't been much disemployment.

So the rise of quasi-experiments is important and good. However, it's important to recognize the limitations of this approach. Quasi-experiments only give us local understanding of the world, not the kind of global understanding that we'd need for really big bold policy moves. In the long run, being able to deeply understand the economy will require working structural models.

The second problem is that quasi-experiments usually must be found by luck rather than purposefully implemented, and even the ones that are purposefully implemented (lotteries, RCTs) are limited in the set of things they can study. This leads to the so-called "lamppost problem," in which easy-to-study things get studied and hard-to-study things get discounted. For example, studies pretty conclusively show that the minimum wage doesn't destroy many jobs in the short run, but the idea that minimum wage constrains job growth over the long run is much harder to study using quasi-experiments. Harder to study, but still important for policy.

So although quasi-experimental results are great and the shift to empiricism is welcome, it's important to keep working on theory as well.

Ways econ could stand to be more scientific

Though it's made progress in the aforementioned areas, econ still has a number of ways it could be more "science-y".

First and foremost, econ needs to get more comfortable with the idea that data can actually kill theories. This is pretty widely regarded as a hallmark of true science - theories can't just be pure assumptions or axioms, they have to be disciplined by data. And adding bells and whistles to patch up theories only gets you so far - at some point, you have to be willing to say "Well, that theory is just wrong," and try something else.

Currently, economists in general are extremely reluctant to toss out any theories at all. Even simple, elementary theories with plausible replacements get excused and excused when they contradict the evidence. A good example is the "Econ 101" theory of labor markets - supply-and-demand might work great for the market for oranges, but it fails pretty catastrophically as a description for the aggregated labor market. Yet this model is still in extremely wide use, both formally and informally.

There are a number of other, less glaring ways that econ continues to over-privilege theory. Paul Pfleiderer notes the prevalence of "chameleon" models that are sold as unrealistic thought experiments but then used by policymakers to support their desired conclusions. Ricardo Reis laments the fact that young economists are forced to insert pointless theory sections into their empirical papers. Econ Nobel prizes are given for developing new methodologies, even if those methodologies haven't yet yielded much in the way of predictive success. And as I noted in my macro presentation, many models continue to include standard elements that are flatly contradicted by the data.

So in order to become yet more scientific, econ needs to stop putting theory on a pedestal. Instead of separating the worlds of theory and empirics, economists should insist that the two follow the same back-and-forth relation that they do in the natural sciences. Theories need to be allowed to fail when measured against data, and data needs to be used to construct new, better theories.

In conclusion

Here's the final slide from the presentation, which I think sums things up quite nicely:

25 comments:

I wonder if the gravity trade models need to change - at least in some industries because of the increased globalisation of supply chains. For example if devaluing your currency is a good measurable way to increase exports i.e a trade relationship that is often assumed then devaluing of a nations' currency might be a trade policy in favour.

Apparently this no longer works except in industries where the supply chain is very local. For example Scottish whisky but not Aston Marton cars. See https://www.wsj.com/articles/when-currencies-fall-export-growth-is-supposed-to-followuntil-now-1497207236

At the very least the uneven effect of changes in currency valuations must impact on the equations used for the gravity trade theory?

I believe "empirical" means "based on, concerned with, or verifiable by observation or experience rather than theory or pure logic" and isn't the right word to distinguish between observations from controllable, repeatable experiment and passive observations of the external world. Have you read e.g. Sean Carroll's or Alan Sokal's "what is science" articles (you're cited in the former)?

First, the many disparate strands and methodologies of economics would have to be judged separately. You did differentiate between lab methodologies and empirical methodologies. But at the very least you should be able to say something about what parts of macro and micro would be judged more or less scientific.

Another issue, is that parts of economics could be more like engineering (which does not have to be scientific) instead of scientific.

Actually, I suspect that there's plenty of mathematical description of peristaltic transport. And if you are talking about chemical breakdown and absorption of the food, that is very well described mathematically.

And lastly, the argument CAN be resolved for some strands of economics, by noting that they ARE NOT scientific. Some flavors of Austrianism are clearly not scientific, being based on false assumptions, lacking proper chains of deduction, and despising measurement.

Paul Pfleiderer notes the prevalence of "chameleon" models that are sold as unrealistic thought experiments but then used by policymakers to support their desired conclusions

This was a problem, but my god, the empirical turn! Locally valid treatment effects from natural experiments or small RCTs are what constitutes the "evidence" in rather more than half the existing "evidence based" policy initiatives of the last few years. Education reform in particular looks like it's more or less nothing but empirical chameleons.

I'd also add that in terms of quasi-experiments, what worries me is not so much the "lamppost problem" as the "no field unplowed, no hill unmined" problem. Every event which superficially looks like it might provide a useful empirical result is going to be studied until it does provide a useful-looking empirical result. Either by the same guy trying different analyses until one hits paydirt, or by a succession of researchers all wondering why nobody else has managed to get anything useful out of this lovely dataset and whether their new empirical approach might have better luck. Inevitably, the dataset will eventually yield an amazingly fragile but eminently publishable result.

I've used for years a labor economics example of empirical research that actually led to a change in the theory used to explain something. And it has to do with unions.

When I took my first course in labor econ, the textbooks basically said that unionization would lead to lower labor productivity by reducing management discretion in how to run the business. In the late 1960s, micro data sets began to become available that allowed researchers to make estimates of *by how much* unionization reduced productivity.

Of course, the research discovered that workers in unionized settings were more productive than workers in non-union settings.

Then began the search to explain that away...by looking at the effects of capital-labor ratios (which were higher in unionized firms, and, b itself would increase labor productivity), by looking at hiring standards (because unionized workers both made more money and were more difficult to fire, firms would seek to hire better workers, which would tend to raise labor productivity), by accounting for jo tenure (unionized workers were less likely to quit, because their alternative jobs would pay less, so workers acquired more employer specific skills, which tended to raise labor productivity), and so on.

After which there remained the finding that workers in unionized setting were more productive, even accounting for all that. At which point, labor economists (my memory tells me that among them were Richard Freeman and Dam Hammermesh) said, well, there must be some mechanism inherent to unionization that leads to workers being more productive.

And by the time I took labor econ in grad school, the theory had changed (to take into account Hirschmann's exit/loyalty/voice framework) and which led to a new prediction--well-run unions (the UAW, for example) would be more likely to lead to increased labor productivity, while badly managed or corrupt unions (the Teamsters) would probably not.

So there is at least one example, dating back 40+ years, of good data killing a bad theory in economics.

"We have seen how it is originally language which works on the construction of concepts, a labor taken over in later ages by science." - Friedrich Nietzsche

Science definition from Google: systematic study of the structure and behavior of the physical and natural world through observation and experiment

In my opinion 'systematic' is the key word. All people observe the world but only scientists do systematic analysis. Economics that is systematic (journals, papers, mathematical analysis, etc.) is science. Banter about economics is not science. 'Systematic' is not an explicit word, so I'm a big fan of the last slide.

Economics: 200+ years of scientific incompetence and fraudComment on Noah Smith on ‘Is economics a science?’

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.#1 With the pluralism of provable false theories economics sits squarely at the proto-scientific level.

The representative economist either does not realize it or cannot officially admit it. In this dire situation, the Pavlovian reaction is always and everywhere to muddy the waters and to retreat deeper into the swamp. Noah Smith is no exception, he rhetorically asks: “What the heck is a ‘science’?” and answers “No one knows.”

This is patently false. Science is, since the ancient Greeks made the distinction between opinion (= doxa) and knowledge (= episteme), well-defined by material and formal consistency: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

First question to Noah Smith: if no one knows what science is how does it come that we have a prize with the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.#2 And how does it come that economics is since Adam Smith/Karl Marx explicitly defined as science? And what does every economist learn in Econ 101?: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

Fact is that economics claims to be a science but is what Feynman called a cargo science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is the true theory. Economics is a failed science because none of the four main approaches satisfies the criteria of material and formal consistency. When this is pointed out economist immediately retract and fire their barrage of brain-dead excuses.#3 Noah Smith applies the same old defense maneuvers. Needless to emphasize that every single of these excuses has been refuted long ago.

Economists have found a way to deal with the problem of manifest failure: they simply ignore and violate scientific standards. Or, as Blaug put it, they are playing tennis with the net down. Morgenstern reminded his fellow economists back in 1941: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.”

This is why Walrasianism is still around although it has already been dead in the cradle 140+ years ago. Standard economics has been based on provable false axioms but economists proudly cling to them until this day: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman) Note in passing that maximization and equilibrium are NONENTITIES like angels or the Easter Bunny. Time for Krugman and the rest to end stubborn self-delusion: all equilibrium models are a priori false and this starts with textbook supply-demand-equilibrium.#4

Economics is a failed science because economists (i) are scientifically incompetent, and (ii), violate scientific standards/ethics on a daily basis. Since Adam Smith economic policy guidance never had sound scientific foundations. Both, orthodox and heterodox economists sell proto-scientific rubbish in the bluff package of science.

In order to become a science, economics needs a paradigm shift.#5 Nothing less will do.

Egmont Kakarot-Handtke

#1 See ‘First Lecture in New Economic Thinking’http://axecorg.blogspot.de/2017/05/first-lecture-in-new-economic-thinking.html

#2 See ‘The real problem with the economics Nobel’http://axecorg.blogspot.de/2016/09/the-real-problem-with-economics-nobel.html

#3 See ‘Failed economics: The losers’ long list of lame excuses’http://axecorg.blogspot.de/2017/01/failed-economics-losers-long-list-of.html

#4 See also ‘The father of modern economics and his imbecile kids’http://axecorg.blogspot.de/2016/11/the-father-of-modern-economics-and-his.html

#5 See also ‘The identification problem and the dumping of the old guard’http://axecorg.blogspot.de/2016/09/the-identification-problem-and-dumping.html

"systematic study of the structure and behavior of the physical and natural world through observation and experiment" captures it.

One essential element of systematic study is having an exact as possible description of what you are studying. Physicists do this with well-defined measures, biologists do this with classificatory schemes, historians do this with careful chronologies. It's an area where economics is often (not always) lacking. The components of, for example, "price" or "cost" or "service" are often not untangled and examined, aggregates not re-visited and so on. This makes local empirical findings - even when well-founded - hard to compare. It's an area where econ could learn a lot from sociology, which is much more careful about what exactly people mean when they say things.

I think Post-Keynesian empirical studies, and analysis of those studies definitely meet the standards being shared in this comment thread to qualify as a science, but the Friedmanite and Austrian schools don't meet that standard. Friedmanites and Austrians are propagandists, not scientists. They are more concerned with pushing supply-sider nonsense that's amenable to the interests of the wealthy, and have demonstrated that they have no real interest in describing how the economy works.

I think economics may become a science, but it isn't a science as it is currently practiced. Most sciences start with "stamp collecting" and use that to build a theory. As the stamp collecting continues and conflicts with the current theories, those theories are changed and updated. We just don't see this in economics. We keep hearing theories that have long been contradicted by reality. Economists win prizes for working with and advacning theories that are demonstrably false.

I used to compare economics as it is currently practiced with alchemy, but as modern chymists have demonstrated, a lot of alchemy was just chemistry in the early "stamp collecting" stage. They were finding interesting reactions, but did not understand them well enough to build a useful theory around them.

Economics seems more like Lysenkoism, a branch of biology practiced in the Stalinist USSR. Lysenkoism conflicted with evolutionary theory in that it argued that organisms could be improved and those improvements inherited in a manner consistent with Communist party doctrine.

Lysenko was in charge of just about all biological research in the USSR, and arguing an alternate theory could get you a stint in the gulag. However, it was compatible with and provided a "scientific" basis for the ruling party under Stalin, so it was promulgated and accepted. Modern economics is quite similar, in that it starts with precepts compatible with the ruling powers and is then developed into a "scientific" theory, acceptable to the point where it challenges political dogma.

I think that economics has a lot to offer, but it is too politically correct for it to be considered scientific.

P.S. Don't get me started on the mathematics that economists use. Weierstrass has been dead for 120 years now.

You argue: “It’s certainly, by a long shot, the most scientific of the social sciences.”

Your lethal methodological blunders are:(i) The underlying binary code of science is true/false with NOTHING in between. Because of this, economics is either a science or not. The statement, economics is more scientific than X is entirely devoid of meaning. (Just like the statement, Jake Thompson is by a long shot more innocent than Lee Harvey Oswald. Guilty/not guilty is also binary with NOTHING in between.)(ii) Scientific truth is well-defined by material and formal consistency. It is not an easy task to establish scientific truth but from these practical difficulties cannot be concluded that it does not exist or that anything goes.(iii) The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

Conclusion: Economics is NOT a science.

In order to rise above the proto-scientific level, economics needs a paradigm shift.#1 What failed economists first of all have to understand is that economics is NOT a social science but a system science. To define economics as a social science has been the foundational blunder 200+ years ago. Being scientifically incompetent, though, economists will not understand this. It’s Catch 22 and the representative economist is trapped in the scientific coal-pit.#2

Egmont Kakarot-Handtke

#1 For details see ‘Redefining economics’http://axecorg.blogspot.de/2015/10/redefining-economics.htmland cross-references Paradigm shifthttp://axecorg.blogspot.de/2015/02/essentials-cross-references.html#2 “... but when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.” (Hume) Obviously, you lack even this tiny quantity of judgement.

Sociology is far more data driven that economics, which is one reason why you never really see sociologists being invited to comment on issues of the day - cause they would make terrible TV, equivocating all the time.

Regarding the Minimum Wage Bombshell, you are assuming the price ceiling of the minimum wage is higher than the equilibrium market price; I doubt those are true in those markets. Labor markets are very complex so I agree a simplified Econ 101 model doesn't work but making that argument with that assumption is an error.

Some parts of Econ are a science (game theory and I'd argue basic macro in simple markets) while the rest is more of an art (everything else). Creating an algorithm for all resource allocation that can be proven is impossible given that human choice/consumption patterns are dynamic and volatile.

You argue: “Some parts of Econ are a science (game theory and I’d argue basic macro in simple markets) while the rest is more of an art (everything else).”

You are trying to evade a clear-cut conclusion and your argument is way beside the point.(i) Economics is either a science or not. That parts of it are acceptable is irrelevant. Every false theory has acceptable parts. Even the flat earth theory has some content that is true. False theories are always partially and commonsensically true. This is exactly why they can survive.(ii) Game theory is NOT economics because economics does not deal with human behavior but with the behavior of the economic system. Economics is a system science and all Human Nature/behavior issues belong to psychology, sociology, anthropology and so on. To define economics as a social science has been the foundational blunder 200+ years ago.(iii) Basic macro is provable false.*(iv) To call economics an art is simply an euphemism.

The conclusion is inescapable: Economics is NOT a science.

Egmont Kakarot-Handtke

* For details see ‘Textbooks and the mental cloning of dumb economists’http://axecorg.blogspot.de/2017/06/textbooks-and-mental-cloning-of-dumb.htmland ‘Why Post Keynesianism Is Not Yet a Science’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438

(i) Tell me your definition of science and we can debate this further. Many people consider Physics a science and there are parts of Physics that are provable and other parts that are theoretical. Survivability is irrelevant to the discussion as there have been previous universal truths that were found to be false when science evolved.(ii) I'm sorry, I thought rational choice theory and behavioral economics was a thing. Please define economics for me because I'd love to hear how you think the efficient way of allocating resources can occur without understanding human preferences.(iii) Macro is an economic estimation of how x amount of micro games are going to work in a system. The art of estimating is not a proof or else more people could do it. There is nothing in my previous post that would indicate that macroeconomics is a science. Please offer a more scientific way of operating a large scale economy so I can phone the press.(iv) Sounds good Shakespeare.

Some of your responses show a lack of understanding of basic economics principles. I don't think you are qualified to conclusively state whether economics is a science or not.

On the off chance that you can make a model of halfway differential conditions to reproduce the whole implanted economy, at that point it is a science. I think this is possible, Minsky perhaps, so I vote that financial aspects is a science.